Subject: UFTO Paper — Business Models
Date: Mon, 16 Jun 1997
From: Ed Beardsworth <edbeards@ufto.com>

This is a new version of an earlier paper. I submitted it to PUF, but they want specific examples. At our meeting in SF next week (details to follow), perhaps we can use these ideas as a springboard for discussion.

In the meantime, comments welcome. (Anyone want to co-author the next attempt to get it into PUF?)

Ed B

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| ** UFTO ** Edward Beardsworth ** Consultant
| 951 Lincoln Ave. tel 415-328-5670
| Palo Alto CA 94301-3041 fax 415-328-5675
| http://www.ufto.com edbeards@ufto.com
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Business Models for New Technology in Utilities (draft)

Edward Beardsworth, Consultant

5/97

Many electric utilities are struggling with how best to conceptualize and implement a “technology strategy” as the industry undergoes major change. How can resources put into R&D and new technology ventures be “driven to the bottom line”?

Too often, utilities suffer from an “action gap” between learning about a new technology and taking steps to do something with it. This gap arises out of lack of resources (time, money and people); lack of clear direction from upper management; risk avoidance (rather than risk management) culture; and perhaps most symptomatic, lack of a framework and process for deciding what’s worth doing and how to do it. There should be an explicit decision process for choosing R&D projects, with criteria that everyone understands. As part of that process, a clear delineation of business models could go a long way towards helping know what to look and plan for.

Company Direction and Strategy
To know what projects to do, and what kinds of information and opportunities to seek, one has to know “what business you’re in”, and thereby what kinds of projects are interesting. (A word of caution — too often the absence of an explicit statement of corporate strategic direction is used as an excuse not to do anything. Strategic planning is a never ending iterative process, and new technology endeavors play two roles. They provide input to the strategy, and they help implement it. The advice, therefore, is to go ahead and “do something” and see where it takes you, while at the same time you work on formalizing and refining the plan.)

It’s important to keep in mind that any new venture is a learning process. At each stage, you learn a little bit more, and decide how and whether to continue. At the outset, you simply won’t know how things will work out. This is often a major barrier to pursuit of new technology in utilities, which tend to want guarantees for each endeavor, rather than taking a portfolio risk approach.

Business Models
Most companies have at least an implicit feel for what kinds of technologies to look for, and how to start getting involved. But how is a new opportunity to be handled? What are the ways it could be organized and funded? What are the desired outcomes? How will anyone know when or if it succeeded?

It may help for companies to examine past and present experience–case studies of projects, deals and undertakings that illustrate the “business models” they’ve already used. (Note that a model may not have been explicitly formulated, nonetheless it’s always there implicitly.)

The business model is a brief generic “story” about how an initiative might develop over time, from idea and inception, to full implementation, to the “bottom line.” How will it contribute to the company’s objectives? How will it be funded? How will it be positioned and managed? And most important, what are the points when decisions will be made to kill it or continue it? (This is at the heart of risk management, as distinct from risk avoidance.) Any proposal needs to tell a “story”, and life will be easier if there’s a shared understanding of what kinds of stories make sense for the company.

Here is a set of generic “business models” for the different kinds of situations that arise. Of course, any particular project is likely to involve aspects of more than one of these models.

“#2 Pencil” — This is the conservative extreme. The company has no strategic interest in the technology, except to buy a mature product from a supplier, and therefore no role in the development beyond telling the vendor about preferences. This category is too easy to use as an excuse for inaction, for there are many gray areas where incremental changes and improvements could lead to benefits and business opportunities.

“First User” — The company needs something that isn’t on the market. Works on ad-hoc basis with developers to push it along, helping to shape it to the company’s specific needs. Recognizes that the company won’t be the only user/buyer. In fact, the product won’t ever be available to the company unless there’s a larger market for a vendor to sell to. Counts on being the first to use it, and first to get it fully implemented on the system, gaining benefits and a time advantage over other utilities. May or may not get royalties or other financial participation.

“Market Competitor” — This one is new to utilities. Companies in competitive industries build competitive advantage for themselves by developing or obtaining proprietary technology that will not become commercially available to other companies. Gone will be the assumption that a vendor will be able to sell it to you, too. Instead, the “energy company” that controls it will use it to take away market share.

“In House Inventor” — Develop an invention by an employee in the company, taking it as far along as it makes sense to do, then put it into one of the other business models. Only a very few utilities have programs to explicitly encourage employee invention.

“Joint Venture” / “Piece of the Action” — A more formal version of “First User”. Structured business deal with another company or companies. Countless variations, i.e. marketing and distribution rights, royalty payments, equity participation, etc. as the quid pro quo for whatever resources the company puts in (anything from time and materials, to use of a facility, to intellectual property, to cash).

“New Line of Business” — A group in the company to develop a product or service, generating a new and different source of revenue.

“Spin Off” — Start up a new company to do whatever it is–manufacturer, deliver a service, etc. On the regulated or unregulated side.

“Seat at the Table” — for more advanced concepts that could wreak major change, it pays to pay for an inside look, and to be able to monitor progress, to know when and if to get more deeply involved. Equity investment or development cofunding is often a good way to “choose a horse and place a bet”.

“Good Citizen/Nice Guy” — Supporting economic development and industrial (and commercial) competitiveness in the sales territory, by finding and brokering solutions to the needs and problems of local firms. Enlightened self-interest, and sometimes can result in a business opportunity, and often but not always increased sales (e.g. electrotechnology).

Other models for involvement in new technology might include:
– Using them to transform the way we do business, e.g. best practices, TQM, RCM, life-cycle management, etc. The tools and techniques for these new approaches are “technologies” in their own right, and often involve the use of technology (e.g. information systems, sensors, analysis software, etc.)
– Contributing to the global common good, e.g. climate. A few utilities have gone public with significant commitments to the environment, and technology fixes are a going to play a major part in the implementation of those strategies.
– Watchful waiting– a less vigorous version of “seat at the table”, involves actively keeping an eye on the literature, attending conferences, etc. Joining a user’s or industry group or advisory committee is often a cost effective way to keep informed. (Designate subject-area experts?)

There is an extensive body of knowledge for managing portfolios of new technology ventures. Usually, measures of “way-out-ness” (risk) and potential impact (reward) are central to such analyses, but that doesn’t show how to position a project in business terms, so it can move forward after the development phase is completed. It’s an issue that must be addressed at the start.

The taxonomy of Business Models offered here may serve as a tool that can help utilities explore how they want to handle various kinds of projects, perhaps as part of their overall corporate game plan for new technology.